Déjà Vu All Over Again: DOL Proposes New Fiduciary Investment Advice Rule

Authors: Katrina L. BerishajLawrence P. Stadulis and Katie Gallop.

In its latest attempt to expand the definition of an investment advice fiduciary, the U.S. Department of Labor (DOL) on Oct. 31 announced a proposed rule under Title I of the Employee Retirement Income Security Act (ERISA) and Section 4975 of the Internal Revenue Code.1 The DOL also proposed amendments to several prohibited transaction exemptions (PTEs).2

Public Hearing and Comment Period

  • public hearing is set to be held beginning on Dec. 12. Requests to testify at the hearing were due by Nov. 29. This is unusual, as the DOL has historically held public hearings after comment periods have closed. This timeline suggests that the DOL is fast-tracking the finalization of the rulemaking package.
  • In a Nov. 14 letter to the Securities Industry and Financial Markets Association (SIFMA), the Assistant Secretary for the Employee Benefits Security Administration declined to extend the 60-day comment period. Comments are due by Jan. 2, 2024.3

Proposed Changes to the Definition of Fiduciary Investment Advice

The DOL seeks to broadly expand the current definition of an investment advice fiduciary, which would virtually make all recommendations to retirement account investors fiduciary in nature. The proposed definition would apply to recommendations that an investor roll over assets from a workplace retirement plan to an individual retirement account (IRA).

Key impacts of the proposal include:

  • “Best Interest” Recommendations: A person who makes investment recommendations to investors regularly as part of their business becomes a fiduciary where the recommendation is provided under the circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.

    These proposed changes are most impactful to broker-dealers and insurance professionals but also apply to banks, investment advisers, trust companies and other service and product providers, including model managers, wholesalers, private fund managers, distributors and platform providers.
  • Rollover and Distribution Recommendations: Recommendations for rolling over, transferring or distributing assets from a plan or IRA — including recommendations regarding whether to engage in a transaction, the amount, the form and the destination of such a rollover, transfer or distribution — could become fiduciary recommendations.

Proposed PTE Amendments

Proposed Amendments to PTE 2020-02

PTE 2020-02 currently permits an investment advice fiduciary to receive variable and third-party compensation for investment advice if the fiduciary provides advice that is in the investor’s best interest and complies with additional conditions of the exemption.

Key impacts of the proposed amendments include:

  • Written Acknowledgement of Fiduciary Status and Other Disclosures: Financial institutions would be required to acknowledge their fiduciary status and to provide investors with a statement of the best interest standard of care, along with a written description of the fiduciary’s services and any conflicts of interest, and other applicable disclosures available upon request. There is also a potential website disclosure. Despite the DOL’s pronouncements otherwise, these requirements may provide a private right of action.
  • Rollover Disclosures and Review: Financial institutions would be required to make disclosures outlining the considerations for the basis of recommending that a retirement investor roll over plan or IRA assets. Such analysis must include alternatives to rollovers, fees and expenses associated with the plan and recommended investments or account; whether the administrative expenses are paid for by the employer or other party; and the different services and investments available under the plan and the recommended account.
  • Expanded Ineligibility Provisions: An expanded scope of criminal convictions, including those of affiliates, would disqualify a financial institution from relying on the exemption.
  • Available to Robo-Advisers and Pooled Plan Providers: PTE 2020-02 would be available for transactions recommended by robo-advisers and pooled plan providers.

Proposed Amendments to PTE 84-24

  • Restrictions on Availability: The exemption would be available only with respect to non-discretionary transactions recommended by “independent producers” selling for solely a commission, insurance products and annuities (from an unaffiliated financial institution) that are not securities. Third-party payments other than commissions would not be covered under the exemption.
  • Addition of Conditions Parallel to PTE 2020-02: The proposed amendments would add conditions that parallel those of PTE 2020-02 for independent producers.

Proposed Amendments to PTEs 75-1, 77-4, 80-83, 83-1 and 86-128

In an effort to force fiduciaries to rely on PTE 2020-02 for non-discretionary transactions, the DOL has proposed the following amendments to PTEs 75-1, 77-4, 80-83, 83-1 and 86-128:

  • Available Solely to Discretionary Fiduciaries: Amendments would remove the ability of non-discretionary fiduciaries to rely on the exemptions. Non-discretionary fiduciaries would be required to rely on PTE 2020-02, PTE 84-24 or another applicable exemption.
  • Additional Amendments to PTE 86-128: The exemption currently requires disclosure and authorization conditions for ERISA plans. The proposed amendments would extend such conditions to IRAs and other non-ERISA plans, as well as add recordkeeping requirements.
  • Additional Amendments to PTE 75-1: The proposed amendments would no longer provide relief for mutual fund transactions under PTE 75-1, Part II, and would add recordkeeping requirements.

1 Retirement Security Rule: Definition of an Investment Advice Fiduciary, 88 Fed. Reg. 75,890 (proposed Nov. 3) (to be codified at 29 C.F.R. pt. 2510).

2 Proposed Amendment to Prohibited Transaction Exemption 2020-02, 88 Fed. Reg. 75,979 (proposed Nov. 3) (to be codified at 29 C.F.R. pt. 2550); Proposed Amendment to Prohibited Transaction Exemption 84-24, 88 Fed. Reg. 76,004 (proposed Nov. 3) (to be codified at 29 C.F.R. 2550); and Proposed Amendment to Prohibited Transaction Exemptions 75-1, 77-4, 80-83, 83-1 and 86-128, 88 Fed. Reg. 76,032 (proposed Nov. 3) (to be codified at 29 C.F.R. 2550).

3 Comment letters can be submitted electronically: PTE 2020-02PTE 84-24; and PTEs 75-1, 77-4, 80-83, 83-1 and 86-128.

Massachusetts Supreme Judicial Court Upholds Massachusetts Fiduciary Rule

By: Lawrence P. Stadulis and Kevin O’Connell

On Aug. 25, 2023, the Massachusetts Supreme Judicial Court unanimously upheld the Massachusetts Fiduciary Rule (the March 2020 Rule), which holds broker-dealers to the same fiduciary standard as investment advisers. This holding is the first of its kind as the Securities and Exchange Commission and other states do not hold broker-dealers to the same high fiduciary standards investment advisers must meet. This is because broker-dealers, unlike investment advisers, typically do not provide personalized advice on an ongoing basis. The Supreme Judicial Court decision reverses a March 2022 lower-court ruling invalidating the March 2020 Rule, stating that Secretary of the Commonwealth of Massachusetts William Galvin had overstepped his authority in promulgating the March 2020 Rule under the Massachusetts Uniform Securities Act (MUSA) and lacked the authority to adopt it.

The original case was brought in April 2021 by Robinhood Financial LLC (Robinhood), an online brokerage firm, after Robinhood was the subject of Massachusetts’ first enforcement action brought under the March 2020 Rule for targeting and taking advantage of inexperienced investors. Robinhood sought to have the March 2020 Rule reversed. The Suffolk County Superior Court held that the March 2020 Rule conflicted with common law, which held that broker-dealers are not fiduciaries when they simply execute trades without providing investment advice.

Following the Suffolk County Superior Court’s ruling that found that Galvin had overstepped his authority in promulgating the March 2020 Rule, the state’s Supreme Judicial Court was required to review challenges to government agency regulations.

Upon review, the Supreme Judicial Court held that “[William Galvin’s] determination that the fiduciary duty rule was necessary for that purpose is owed deference, where, as here, the conclusion is supported by the extensive regulatory record.” Under the MUSA, Galvin has the power to define “unethical or dishonest conduct practices” as he deems appropriate.

Furthermore, the court held that Galvin considered various factors before implementing the rule, including his securities division’s experience, empirical studies and public comments.

Robinhood reported that in light of the Massachusetts Supreme Judicial Court’s decision, it is currently evaluating its potential options.

Biden Vetoes Anti-ESG Measure

By: Katrina L. Berishaj, Sara P. Crovitz and Kevin O’Connell

On March 20, 2023, President Joseph R. Biden issued his first presidential veto to reject the recent joint Congressional resolution that would have repealed the U.S. Department of Labor’s (DOL) January 2023 “ESG Rule.” Just a few days later, on March 23, the U.S. House of Representatives failed to override the veto, meaning that, for now, the DOL’s ESG Rule remains intact.

Summary of the DOL’s ESG Rule
The DOL’s ESG Rule, which became effective on January 30, 2023, provides a principles-based approach with respect to fiduciary investment decision-making processes. Consistent with ERISA, the regulation requires that ERISA plan fiduciaries focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan. The ESG Rule allows fiduciaries to determine which factors are relevant to risk and return analyses without mandating consideration of any factors in particular. The regulation makes it clear that risk and return factors may include the economic effects of climate change and other environmental, social or governance factors.

Other Attacks on the ESG Rule
Notwithstanding President Biden’s veto, there are two ongoing lawsuits attacking the ESG Rule. In January 2023, 25 state attorneys general joined by a fossil-fuel company, a fossil-fuel advocacy group and a Manhattan Institute fellow are suing the DOL in the Northern District of Texas in an attempt to block the ESG Rule on the grounds that the regulation violates the Administrative Procedures Act and that the DOL exceeded its statutory authority in promulgating the rule. In February 2023, two Wisconsin-based 401(k) plan participants filed a lawsuit in the Eastern District of Wisconsin on similar grounds.

In addition, certain Republican members of the U.S. House of Representatives have indicated that they are working on legislation to amend ERISA to make it more difficult to consider ESG factors with respect to plan investments.

Key Considerations
These developments highlight just how politicized ESG has become. Nevertheless, even in the absence of a DOL regulation that specifically contemplates ESG factors, to the extent that the economic effects of climate change and other environmental, social or governance factors bear on the risk and return analysis of an investment, the ERISA duties of prudence and loyalty would permit consideration of such factors with respect to investment decisions.

In addition to addressing ESG considerations, the ESG Rule also underscores that a fiduciary’s duty to manage plan assets includes the appropriate exercise of shareholder rights related to those shares, including the right to vote proxies. In effect, fiduciaries should vote proxies unless there are good reasons not to.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2023 Stradley Ronon Stevens & Young, LLP. All rights reserved.

U.S. Department of Labor Proposes Substantial Amendments to QPAM Exemption

By: Katrina L. Berishaj and Mustafa K. Almusawi


On July 27, 2022, the U.S. Department of Labor’s Employee Benefits Security Administration proposed significant amendments to the Prohibited Transaction Class Exemption 84-14 for qualified professional asset managers, also known as the “QPAM Exemption.”

The proposed amendments (the Proposal) are summarized below. Comments are due to the DOL by Sept. 26, 2022.


The prohibited transaction rules of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) generally prohibit most transactions between an ERISA plan and a “party in interest.”1 Prohibited transaction exemptions allow for an ERISA plan to engage in otherwise prohibited transactions.

The QPAM Exemption provides broad relief from the prohibited transaction rules. Where a QPAM complies with the terms and conditions of the Exemption, the QPAM is permitted to transact on behalf of a plan or IRA without having to verify whether a counterparty is a party in interest. Because of the broad relief that the Exemption provides, it has become common practice for managers to make representations regarding their QPAM status in agreements with clients and service providers.

Summary of the Proposed Amendments

The proposed amendments would:

  1. Require that a QPAM Notify DOL of their Reliance on the Exemption
    The Proposal would require a QPAM to notify the DOL, by email, of the legal name of each business entity relying upon the Exemption and any name the QPAM may be operating under. QPAMs would be required to update the notification if there are any changes in the information.
  2. Limit the Scope of Transactions for which the Exemption is Available
    The proposed amendments state that the Exemption would provide relief only in connection with an account managed by the QPAM that is established primarily for investment purposes. The DOL explains in the preamble that the Exemption is unavailable in connection with non-investment transactions, such as, for example, hiring a party in interest to provide services to a plan.

    In addition, the Exemption would not provide relief for any transaction that has been “planned, negotiated, or initiated by a Party in Interest, in whole or in part, and presented to a QPAM for approval.” Currently, there is no such limitation in the Exemption.

  3. Expand Disqualifying Conduct to Include Foreign Crimes and “Participating in Prohibited Misconduct”

    Foreign Crimes
    The Proposal would make explicitly clear that a QPAM would be disqualified from relying on the Exemption if the QPAM or any affiliate was convicted in a foreign jurisdiction of crimes that are substantially equivalent to the U.S. federal or state crimes enumerated in the Exemption.

    “Prohibited Misconduct”
    The Proposal would add a new category of misconduct that would disqualify a QPAM from relying on the Exemption. “Participating in Prohibited Misconduct” would include: any conduct that forms the basis for a non-prosecution or deferred prosecution agreement that – if successfully prosecuted – would have led to a disqualifying conviction of any of the crimes enumerated in the Exemption (and any foreign equivalents); engaging in a systemic pattern of practice of violating the conditions of the Exemption; intentionally violating the conditions of the Exemption; and the provision of materially misleading statements to the DOL in connection with the Exemption.
    The Proposal also sets forth an administrative procedure by which the DOL would be able to disqualify a QPAM that participated in Prohibited Misconduct. The DOL would first issue a warning and then provide the QPAM an opportunity to be heard, subject to certain timelines.

  4. Required Contractual Terms  Hold Harmless and Indemnification of Plan Clients in Connection with Disqualification
    The amendments would also require that a QPAM state, in writing, to plan clients that, if the QPAM is disqualified from relying on the Exemption (and for ten years thereafter), the QPAM:

    • agrees not to restrict the ability of a plan client to terminate or withdraw from its arrangement with the QPAM
    • will not impose fees, charges, or penalties on plan clients in connection with the plan client’s decision to terminate the QPAM
    • agrees to indemnify, hold harmless and promptly restore actual losses to each plan client for certain damages arising out of the failure of the QPAM to remain eligible for relief under the QPAM Exemption
    • will not employ or knowingly engage any individual that participated in the disqualifying conduct
  5. Require a One-Year Wind-Down Period
    The Proposal would require that a disqualified QPAM be subject to a mandatory one-year wind-down period. This is intended to provide existing plan clients with time to decide whether to terminate the QPAM and to transition plan assets from the QPAM to another manager, if necessary.

    The wind-down period would not provide relief for any new transactions or for transactions with respect to new plan clients of the QPAM. Within 30 days of its disqualification, the QPAM would be required to provide a notice of its disqualification to its plan clients and to the DOL stating that the QPAM has failed to comply with the Exemption, the start of the one-year winding-down period, the clear and objective description of the facts underlying the disqualifying conduct, and the Exemption’s required contractual terms (as summarized in 4 above).

  6. Individual Exemption Process
    The Proposal provides that a QPAM who becomes disqualified or anticipates becoming disqualified may apply for an individual exemption. This provision explains that the QPAM should anticipate the same conditions as provided in the most recently granted individual exemptions involving similar relief. To the extent that a QPAM requests any deviations therefrom, it must explain in detail why such variation is necessary and in the interest and protection of the affected plans, plan participants and beneficiaries and/or IRA owners. The application would also be required to quantify the specific cost or harms, if any, that the client plans would suffer if the firm could not rely on the Exemption after the winding-down period.
  7. Require that Records be Kept for 6 Years and Available for Inspection
    Consistent with other prohibited transaction exemptions, the Proposal would require a QPAM to retain for six years records sufficient to demonstrate the QPAM’s compliance with the Exemption. The Proposal would require that the records be available for inspection by certain relevant people, including the DOL, IRS, plan fiduciaries, plan sponsors, plan participants, and IRA owners.
  8. Increase AUM and Equity Thresholds to Qualify as a QPAM
    The Proposal would make the following adjustments with respect to AUM and equity thresholds:
  • For registered investment advisers, increase the assets under management threshold from $85 million to $135.87 million and the owners’ equity threshold from $1 million to $2.04 million.
  • For banks, savings and loan associates, and insurance companies, increase the owners’ equity threshold from $1 million to $2.72 million.

The DOL would be able to make annual adjustments for inflation to the thresholds.

Key Takeaways

These amendments would significantly impact entities that rely on the QPAM Exemption, as well as plans, plan fiduciaries, counterparties to transactions involving QPAMs and others. The amendments would impose significant compliance burdens and costs on QPAMs, including the need to amend existing agreements to comply with the conditions. Additionally, the indemnification and hold harmless provisions are likely to increase the potential liabilities of a QPAM that becomes disqualified. The DOL proposes that a final rule would become effective 60 days after publication in the Federal Register. Interested parties should consider submitting comments to the DOL.

1 Similar prohibitions apply with respect to individual retirement accounts under Section 4975 of the Internal Revenue Code. The QPAM Exemption is available for transactions on behalf of such accounts, as well.

“Fat-Free” ESG: SEC Proposes Rule Changes Related to Fund Names and Fund and Adviser Disclosure Related to ESG Investment Strategies


On May 25, 2022, the U.S. Securities and Exchange Commission (SEC), in 3-1 votes, proposed (1) amendments to Rule 35d-1 (the Names Rule) under the Investment Company Act of 1940 (the Names Rule Proposal) and (2) disclosure requirements for registered investment funds and investment advisers related to environmental, social and governance (ESG) investment strategies (the ESG Proposal). The Names Rule Proposal would expand the scope of terms subject to the Names Rule to include those that suggest that a fund focuses on investments that have, or investments whose issuers have, particular characteristics, would set limitations on the ability of a fund to depart from its investment policy under the Names Rule, and would modify certain other requirements of the Rule. The ESG Proposal mandates certain prospectus and/or annual report disclosure for investment companies and Form ADV disclosure for investment advisers that consider ESG as a part of their investment process. The SEC generally proposes a one-year transition period to come into compliance with the rules if adopted. Public comments on the Names Rule Proposal and the ESG Proposal must be received 60 days after publication of each Proposal in the Federal Register. Full article…

Deadline to Comply with DOL Investment Advice Exemption Fast Approaching

Financial services firms that interact with retirement investors, such as participants and fiduciaries of ERISA-covered plans, as well as individual retirement accounts (IRAs), should take this opportunity to consider the extent to which they provide recommendations (i.e., non-discretionary investment advice) to these investors, and, if so, whether reliance on an exemption from the prohibited transaction rules is necessary. This is relevant because U.S. Department of Labor (DOL) Prohibited Transaction Exemption (PTE) 2020-02, the newest and most notable exemption available to investment advice fiduciaries, is slated to go into full effect starting on Feb. 1, 2022 (the requirements specific to rollover advice become effective on July 1, 2022).

We suggest first determining if recommendations are being provided in the first place. Some communications are not investment advice, such as marketing and investment education. But these communications can morph into advice, as defined under ERISA, as they become more tailored to the investor and as specific products, services or accounts are identified for the investor. It is a fact-intensive inquiry, which is why one should, as a preliminary matter, ascertain the nature of communications with current and prospective investors.

If recommendations are being provided to retirement investors and fiduciaries, then an exemption strategy will be warranted to receive any compensation in connection with the advice. PTE 2020-02 was built for these types of arrangements, but it contains numerous conditions, most of which, as noted above, go into effect early next year. One important condition (among others) is a need for policies and procedures that are prudently designed to ensure compliance with the exemption’s “impartial conduct standards.”

Please feel free to reach out with any questions.

SEC Adopts Universal Proxy and Proposes to Rescind Certain 2020 Proxy Solicitation Rules

By: Sara P. Crovitz and Wesley Davis

On Nov. 17, 2021, the Securities and Exchange Commission (SEC) adopted amendments to proxy voting rules (Final Rule) to require the use of a universal proxy card in contested director elections. The universal proxy card must include all registrant and dissident director nominees in non-exempt director elections, allowing shareholders to vote on each nominee rather than an entire slate of directors.1 In a separate rulemaking, the SEC proposed amendments (Proposed Amendments) to proxy voting rules that generally would rescind certain 2020 rules governing advice provided by proxy voting advisors.2


• The Final Rule does not apply to the director elections of investment companies or business development companies.

• The Final Rule is expected to make it easier for activist investors to win at least some board seats as the process to put dissident directors on the proxy card will be cheaper and more efficient.

• The Final Rule will become effective for any shareholder meeting held after Aug. 31, 2022.

• While the Proposed Amendments would rescind requirements that proxy voting advisors provide issuers an opportunity to comment on and provide their clients (e.g., investment advisers) with a mechanism by which the clients can reasonably be expected to become aware of any comments by public companies that are the subject of the advice, the largest proxy voting advisors have voluntarily provided similar opportunities and may continue to do so.3  This issue has become highly politicized and could be reversed again in a future administration.4

• The Proposed Amendments request comment on whether SEC guidance issued in conjunction with the 2020 Rules – which suggested how investment advisers should consider public company comments received through proxy voting advisor’s mechanisms – should also be reconsidered or rescinded.

Universal Proxy

  • General. For years, shareholders and their advocates have expressed concerns about being unable to choose a mix of dissident and registrant nominees when voting on contested director elections by proxy. To address the difference in voting opportunities between voting in person versus via proxy, new Rule 14a-19 under the Securities Exchange Act of 1934 (34 Act) includes a mandatory requirement to use a universal proxy card that includes the names of all director nominees from both the registrant and dissident(s) in a contested election. The universal proxy card will permit shareholders to vote for or against individual directors, rather than the current practice of having to choose between the registrant’s and dissident’s slates of directors.5
  • Minimum Solicitation Requirement. For dissident nominees to be listed on a universal proxy card, the dissident must indicate its intent to meet the minimum solicitation requirement when notifying a registrant of its nominees. The dissident must also solicit shareholders representing at least 67% of the voting power of shares entitled to vote in the election.6
  • Notice and Filing Requirements. The Final Rule adopts, as proposed, the requirement that a dissident provide the registrant with names of nominees for whom it intends to solicit proxies at least 60 calendar days before the anniversary of the previous year’s annual meeting date.7  Dissidents also must comply with advance notice requirements included in the registrant’s bylaws, which may be longer. Registrants will be required to notify dissidents of their nominees no later than 50 days before the anniversary of the previous year’s annual meeting date.8  Both a registrant and dissident’s proxy statement “must direct shareholders to the opposing side’s proxy statement for information about that participant’s nominees” rather than including such information in its proxy statement.9
  • Universal Proxy Presentation and Formatting Requirements. The Final Rule includes universal proxy card formatting and presentation requirements meant to avoid shareholder confusion and to “ensure that each side’s nominees are grouped together and clearly identified as such and presented in a fair and impartial manner.”10
  • Additional Amendments for All Director Elections. Additional amendments to the form of proxy and disclosure requirements apply to all director elections, not only those that are contested. Unlike the universal proxy voting requirements, these amendments also apply to registered investment companies and business development companies.11  These amendments mandate that a form of proxy for the election of directors include an “against” voting option in lieu of a “withhold authority to vote” option where permitted by state law.12  They also provide shareholders with the “opportunity to ‘abstain’ in a director election governed by a majority voting standard.”13

Proxy Solicitation Rules

  • General. The Proposed Amendments would rescind certain final rules regarding proxy voting advice under the 34 Act that the SEC adopted in the 2020 Rules. The Proposed Amendments were adopted by a vote of 3-2, with Republican Commissioners Peirce and Roisman dissenting. Comments on the Proposed Amendments will be due thirty days after their publication in the Federal Register.
  • Proposed Amendments to Rule 14a-2(b)(9). The 2020 Rules added conditions that proxy voting advisors must meet in order to take advantage of exemptions from certain solicitor information and filing requirements. The Proposed Rules would retain conflicts of interest disclosure requirements, and proxy voting advice would remain a solicitation subject to the federal proxy rules. Additional conditions (and related safe harbor and exclusions) would be deleted under the Proposed Amendments. In particular, proxy voting advisors no longer will be required to make their advice available to the public companies on which they are providing advice at or before the time that they provide such advice to their clients or to provide a mechanism by which their clients could reasonably be expected to become aware of any written statements by public companies regarding their proxy voting advice in a timely manner and before the relevant shareholder meeting.14
  • Proposed Amendment to Rule 14a-9. A proxy voting advisor’s proxy voting advice generally constitutes a solicitation, according to the SEC, and such advice is prohibited from “containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact.”15  Note (e) of Rule 14a-9 provides examples of material misstatements related to proxy voting advice. This note would be deleted under the Proposed Amendments, based on concerns that liability could extend to mere differences of opinion with public companies regarding proxy voting advisor’s advice. Such liability concerns could impair the independence of the advice that proxy voting advisors provide because it could lead to public companies threatening litigation against proxy voting advisors in order to influence the advice that they provide.16

1 See Universal Proxy (https://www.sec.gov/rules/final/2021/34-93596.pdf) (adopted Nov. 17, 2021) (to be codified at 17 CFR 240) (Final Rule Release). The Final Rule was adopted substantially as proposed by a vote of 4-1, with Commissioner Peirce dissenting.

2 See Proxy Voting Advice (https://www.sec.gov/rules/proposed/2021/34-93595.pdf) (proposed Nov. 17, 2021) (to be codified at 17 CFR 240) (Proposed Amendments Release); Exemptions from the Proxy Rules for Proxy Voting Advice (https://www.sec.gov/rules/final/2020/34-89372.pdf) (effective Nov. 2, 2020) (17 CFR 240) (2020 Rules Release).

3 Proxy voting advisors established a best practice principles group (BPPG), which has an oversight committee composed of non-affiliated industry experts and academics. The oversight committee’s 2021 report found that all six members of the BPPG including the two largest U.S. proxy voting advisors met the best practices principles regarding “(1) service quality, (2) conflicts-of-interest avoidance or management and (3) communications policy.” Proposed Amendments Release. at 14.

4 It is also possible that, if adopted, the Proposed Amendments could be subject to litigation. The National Association of Manufacturers already had filed suit against the SEC for announcing it would not enforce the 2020 Rules. See National Association of Manufacturers et al. v. SEC, No. 7:21-cv-183 (W.D. Tex.). The dissenting statements by Commissioners Roisman and Peirce highlight their procedural concerns regarding the rulemaking. Elad L. Roisman, Commissioner, U.S. Sec. & Exch. Comm’n, “Too Important to Regulate? Rolling Back Investor Protections on Proxy Voting Advice” (https://www.sec.gov/news/statement/roisman-proxy-advice-20211117) (Nov. 17, 2021); Hester M. Peirce, Commissioner, U.S. Sec. & Exch. Comm’n, “Dissenting Statement on Proxy Voting Advice Proposal” (https://www.sec.gov/news/statement/peirce-proxy-advice-20211117) (Nov. 17, 2021).

5 Final Rule Release at 8-9. Under current practice, shareholders are generally unable to vote for a mix of dissident and registrant nominees due to state and federal laws. The dissident and registrant generally send a proxy card listing only their respective nominees because consent is required to list an opposing party’s nominees on a proxy card, which is rarely provided. Additionally state law “provides that a later-dated proxy card invalidates an earlier dated proxy card,” which means that a shareholder “must choose between the dissident’s or registrant’s proxy card.”

6Id. at 27. The proposed rule would only have required a dissident to solicit shareholders representing at least a majority of shares. Commissioner Roisman stated that the revised minimum solicitation requirement “is a large reason that I am able to support the rule.” Elad L. Roisman, Commissioner, U.S. Sec. & Exch. Comm’n, “Statement on Universal Proxy Rules” (https://www.sec.gov/news/statement/roisman-universal-proxy-20211117) (Nov. 17, 2021).

7 Final Rule Release at 26-27.

8 Id. at 33.

9 Id. at 23-24.

10 Id. at 24.

11 Id. at 56, fn. 146.

12 Id. at 58.

13 Id.

14 Proposed Amendments Release at 9-10.

15 Id. at 25.

16 Id. at 27.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2021 Stradley Ronon Stevens & Young, LLP. All rights reserved.